The 4% Rule: Risks of an All-Equity Retirement Folio

Retirees are often drawn to a tempting idea: since equities tend to deliver higher long-term returns, holding more of them in a retirement portfolio should improve outcomes.

- RAVI SARAOGI

Wouldn’t it be nice to escape the meagre 3% withdrawal rate by leaning more on equities? Unfortunately, it’s not that simple.

Beyond a point, raising equity allocation can reduce—not increase—the withdrawal rate. The reason lies in a crucial but often overlooked concept: sequence of return risk. In portfolios with regular withdrawals, it’s not just the returns but the order in which they come that can have a big impact.

For example, consider retirees A and B. They invest 100% of their retirement corpus in equities. Over five years, both withdraw the same amount annually and earn the same average return—but in a different order. A sees returns of -20%, -10%, 0%, 10%, and 20% from year 1 to 5, while B experiences the reverse: 20%, 10%, 0%, -10%, and -20%. Despite identical withdrawals and average returns, A ends up with less by year 5, while B retains more. This is sequence risk—the impact of return order during withdrawals.